The problem is the fact your using it from a network drive. In the .NET framework network drives have a lower set of privileges than the local disk, somethings will work, others won't.
You can configure your security settings using caspol:http://msdn2.microsoft.com/en-us/library/cb6t8dtz(SQL.80).aspx
But I've always found it a bit of a nightmare - easier just to let it run from the localhard drive.
Aha!
Thanks very much for that info, it works fine now!
BTW, is there a way of seeing the console output inside Visual Studio?